Executive Summary: The NGA's Misguided Plan to Tax the Internet and Create a New National Sales Tax

A
heated showdown over the taxation of the Internet is taking place
within the Advisory Commission on Electronic Commerce (ACEC),
appointed by Congress under the Internet Tax Freedom Act of 1998 to
study the feasibility of taxing the Internet and electronic
transactions. The commission's final report to Congress is due in
late April. So far, however, members have been unable to reach
meaningful consensus on substantive recommendations, and they
remain bitterly divided on the central issue: Should sales taxes be
applied to electronic commerce?

Members of Congress therefore must prepare
once again to address the issue of Internet taxation. As they do
so, they should remember their constitutional obligation to protect
both the sovereignty of state and local governments and the free
flow of interstate commerce. The ACEC and Congress can achieve
these objectives by adopting a plan that:

Does not impose discriminatory or
burdensome taxes on interstate commerce;

Adopts a sound "nexus" standard
that makes it clear which forms of sales taxation are
legitimate;

Encourages vigorous jurisdictional
tax competition;

Does not violate individual or
corporate privacy; and

Allows the Internet to continue to
grow and thrive.

On
each of these counts, the leading plan currently before the ACEC
moves in the opposite direction. Offered by the National Governors'
Association (NGA), this plan encourages the states to devise a
system for the extraterritorial collection of sales taxes on
Internet sales and, eventually, all forms of retail commerce. It is
economically illogical and constitutionally suspect because it:

Creates a "Trusted Third Party" tax
collection system that could compromise individual and corporate
privacy;

Is unnecessarily complex and could
be extremely costly to implement;

Is not "voluntary" as the NGA
claims; and

Is at odds with the Clinton
Administration's proposed "global free trade zone" for
international commerce and could threaten American
sovereignty.

The
NGA plan is premised on two myths: that the Internet is a massive
drain on state and local tax revenues and that it is unfair to
exempt interstate vendors of commerce from taxes that Main Street
businesses must pay. In reality, state and local tax revenues and
budget surpluses are at an all-time high thanks to a high-tech
Internet economy that has fueled unprecedented levels of economic
growth and job creation. Additionally, out-of-state vendors of
electronic commerce, though subjected to the same tax burdens that
Main Street vendors must bear, would receive no benefits for the
taxes they paid to state and local governments where they did not
reside. This amounts to a form of taxation without
representation.

The
NGA proposal would subject Internet vendors--and all retail
commerce--to an unprecedented, unconstitutional, and economically
illogical system of sales tax administration. ACEC members and
congressional policymakers would be wise to examine the NGA plan
and others like it in light of a question posed by Federal Trade
Commissioner Orson Swindle during the commission's New York City
meeting: "Should policymakers apply a Depression-era tax system to
the economy of the 21st Century?"

Because this is exactly what the NGA plan
would do, both the ACEC and Congress should reject it and seek
instead to establish a plan that allows state and local governments
to impose sales taxes only on those Internet companies that have a
physical presence or "taxable nexus" within their jurisdictions.
Such an ­origin-based system of sales tax administration would
be consistent with the Constitution and Supreme Court
jurisprudence. It also would eliminate any perceived need to create
the sort of inefficient and burdensome national sales tax system
that has been proposed by the National Governors' Association.

Adam D. Thierer is a
former Alex C. Walker Fellow in Economic Policy in the Thomas A.
Roe Institute for Economic Policy Studies at The Heritage
Foundation.

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